The importance of new analyst coverage is evident from the extensive data it unearths for investors. Analysts are privy to vital information, which is crucial to investment decisions.
Do analysts create value for companies by initiating coverage? Coverage initiation on a stock by analyst(s) is actually a sign of increased investor keenness. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under the microscope definitely has some value. Why do analysts initiate coverage? Of course, stocks are not randomly picked to cover. New coverage on a stock is usually the result of a promising future envisioned by the analyst(s). At times, increased investor focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to back something that is already in demand? Advanced Drainage Systems, Inc. ( WMS Quick Quote WMS - Free Report) , Franklin Electric Co., Inc. ( FELE Quick Quote FELE - Free Report) , Ardmore Shipping Corporation ( ASC Quick Quote ASC - Free Report) and Kura Sushi USA, Inc. ( KRUS Quick Quote KRUS - Free Report) are some stocks that have seen new analyst coverage lately. These, therefore, are expected to attract investor attention. Impact of Analyst Coverage on Stock Price
The price movement of a stock is generally a function of the recommendations on it from new analysts. Stocks typically see an upward price movement with new analyst coverage compared to what they witness with a rating upgrade under an existing coverage. Positive recommendations – Buy and Strong Buy – generally lead to a significantly positive price reaction than Hold recommendations. On the contrary, analysts hardly initiate coverage with a Strong Sell or Sell recommendation.
Now, if an analyst issues a new recommendation on a company that has very few or no existing coverage, investors start paying more attention to it. Also, any new information attracts portfolio managers to build a position in the stock. However, one should also look for the average change in broker recommendation rather than a single recommendation change. So, it’s a good strategy to bet on stocks that have seen increased analyst coverage over the last few weeks. Screening Criteria Number of Broker Ratings now greater than the Number of Broker Ratings four weeks ago (this will shortlist stocks that have recent new coverage). Average Broker Rating less than Average Broker Rating four weeks ago ('less than' means 'better than' four weeks ago). Increased analyst coverage and improving average rating are the primary criteria of this strategy but one should also consider other relevant parameters to make it foolproof. Here are the other screening parameters: Price greater than or equal to $5 (as a stock below $5 will not likely create significant interest for most investors). Average Daily Volume greater than or equal to 100,000 shares (if volume isn’t enough, it will not attract individual investors). Here are four out of the 12 stocks that passed the screen: Advanced Drainage Systems: Headquartered in Hilliard, OH, this company provides innovative water management solutions in stormwater and on-site septic wastewater industries. Despite a challenging operating environment, the material conversion strategy, complete water management solutions and focus on key sales programs have been driving Advanced Drainage Systems’ growth. WMS currently carries a Zacks Rank #1 (Strong Buy). The stock has gained 12.1% over the past three months, outperforming the industry’s 0.4% gain. Earnings estimates for fiscal 2023 have increased to $4.23 per share from $4.18 over the past 60 days. The estimated figure calls for an 18.8% increase from the year-ago period. Franklin Electric Co.: Franklin Electric is headquartered in Fort Wayne, IN, and engages in designing, manufacturing, and distributing water and fuel pumping systems worldwide. The FELE stock has gained 27.7% over the past three months compared with the industry’s 2.1% rise. Earnings estimates for 2022 have increased to $4.13 per share from $3.64 over the past seven days. The estimated figure calls for a 32.4% increase from the year-ago period. FELE currently carries a Zacks Rank #1. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Ardmore Shipping Corporation: This Pembroke, Bermuda-based engages in the seaborne transportation of petroleum products and chemicals worldwide. Ardmore Shipping currently carries a Zacks Rank #1. ASC has gained 27.8% over the past three months, outperforming the industry’s 6.4% drop. Earnings estimates for 2022 have increased to $2.42 per share from $2.02 over the past seven days. The estimated figure calls for a 318% increase from the year-ago period. Kura Sushi USA: Based in Irvine, CA, Kura Sushi USA is a subsidiary of Kura Sushi, Inc. The company operates technology-enabled Japanese restaurants in the United States. KRUS currently carries a Zacks Rank #2. The stock has gained 98.5% over the past three months, outperforming the industry’s 7.1% gain. Loss estimates for 2022 have narrowed to 24 cents from 44 cents over the past month. The estimated figure calls for an 88.9% improvement from the year-ago period. You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge. The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out. Click here to sign up for a free trial to the Research Wizard today. Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance